PIMCO: "U.S. Downgrade Heralds A New Financial Era"

Time for deeply introspective Op-Eds galore. Not too surprisingly, the first one comes from blogging powerhouse Pimco, and its chief literary superstar, Mo El-Erian, titled "U.S. Downgrade Heralds a New Financial Era." While Mohamed's outlook is mostly politically correct fluff, he does bring up the absolutely spot on point that FrAAAnce is about to become FrAAnce, which also means that Germany's worst nightmare: that of backstopping the EFSF entirely on its own, is about to become reality.

From PIMCO

There will be endless debate on whether S&P, the rating agency, was justified in stripping America of its AAA rating and — adding insult to injury — even attaching a negative outlook to the new AA+ rating. But this historic action has now taken place, and the global system must adjust. There are consequences, uncertainties, and a silver lining.

Not so long ago, it was deemed unthinkable that America could lose its AAA. Indeed, “risk free” and “US Treasuries” were interchangeable terms — so much so that the global financial system was constructed, and has operated on the assumption that America’s AAA was a constant at the core, and not a variable.

Global financial markets will reopen on Monday to a changed reality. There are immediate operational consequences, from re-coding risk and trading systems to evaluating collateral and liquidity management. Key market segments will be closely watched, including the money market complex and the reaction of America’s largest foreign creditors.

Meanwhile, for the real economy, credit costs for virtually all American borrowers will be higher over time than they would have been otherwise. Animal spirits, already hobbled by the debt ceiling debacle, will again be dampened, constituting yet another headwind to the generation of investment and employment.

It is hard to imagine that, having downgraded the US, S&P will not follow suit on at least one of the other members of the dwindling club of sovereign AAAs. If this were to materialise and involve a country like France, for example, it could complicate the already fragile efforts by Europe to rescue countries in its periphery.

The future role of rating agencies will also now come under close scrutiny, bringing to the fore the question of who rates the rating agencies? S&P’s action will likely unite governments in America and Europe in an effort to erode their monopoly power and operational influence. This will also force all investors to do something that they should have been doing for years: conduct their own ratings due diligence, rather than rely on outsiders.

More worryingly, there will now be genuine uncertainties as to wider systemic impact of this change. With America occupying the core of the world’s financial system, Friday’s downgrade will erode over time the standing of the global public goods it supplies - from the dollar as the world’s reserve currency to its financial markets as the best place for other countries to outsource their hard-earned savings. This will weaken the effectiveness of the US as the global anchor, accelerating the unsteady migration to a multi polar system while increasing the risk of economic fragmentation.

These factors will play out over time, and will possibly do so in a non-linear fashion. Some of the immediate impact will be forestalled by the fact that no other country is able and willing to replace the US at the core of the global system. Other than a general increase in risk premia and volatility, it is therefore hard to predict with a high degree of conviction how the global system will react. Specifically, will it simply come to a new normality, with an AA+ at its core, or are further structural changes now inevitable?

All of that said, there a sliver of a silver lining — and an important one. America’s downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country’s eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.

There is a risk, of course, that different political factions will use S&P’s action as a vindication of their prior beliefs. Democrats would argue that it is recent Republican political sabotage that pushed S&P over the edge while Republicans would argue that we are here due to irresponsible government spending by the Democrats.

For the sake of their country and the wider global economy, both parties should resist the urge to begin bickering. Instead they should seize this potential “Sputnik Moment” — a visible shock to the national psyche that can unify Americans around a common vision and a renewed sense of purpose — that of halting gradual secular decline by putting the country back on the path of high growth, job creation and financial soundness.

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It's not the economics of the AAA rating that matters and the scary thing is TPTB know this. It is just one more chink in the armor of americanism that the government has allowed to occur because they are all corrupt and could care less about people. These assholes will of course blame each other, George Bush, the Tea Party, too much pork, not enough taxes.....and the band will play on as the Titanic sinks!

I think we see one of two things. Either S&P found jesus and now has a conscience to deal with, or we're looking at a far more twisted manipulation of public opinion than the surface describes. For instance, it is obvious that SS/Medicare/Military will never be cut "willingly" by the political class for they are all compromised. However, if rates jump, and the economic sitation takes a serious downturn, we may get the sort of market forced austerity Schiff has been talking about all along. After all, if you're a politician, you don't want to go down as the guy who voted to "let the terrorists loose" or the guy who voted to "let granny starve". We know that's how that stuff would be spun, so it is what it is.

So, what if the market forces austerity? Then the politicians can spin it as they were forced to do it. Nevermind it was their own action/inaction which got us here in the first place. Now they MUST cut, and cut big, because if they don't it's game over. Welcome to interest rate austerity.

I'm not sure if that's how it will play out. This is just a thought experiment, really.

putting the country back on the path of high growth, job creation and financial soundness.

Keynesians think we need government debt to do this, Austrians know that public debt is a drain on growth. Until the Keynesians capitulate, there is no hope for a bright outcome. Good job PIMPCO, for overlooking the obvious.

saudi market was closed on thursday and friday. I suspect at least part of this is catching up to the massive beating stocks took those days. the $5 drop in oil since the last time they were open might also have an impact

As the poster above noted, the Saudi market was closed on Thursday (when the S&P dropped 5%) and Friday. 98% of the Saudi economy is petroleum - and that has tanked. The fall in the Saudi market reflected what happened in world markets.

It doesn't look like there was any reaction in the Saudi market to the downgrade per se.

Another point: The news was leaked to the market throughout the day. The S&P basically made it clear that the downgrade was coming. Everyone on the street knew it was coming that evening.

Personally, I think that if the market reacted badly to the leak, the S&P would have held off on the downgrade or nixed it altogether. But, the market closed unchanged and the Treasury sell-off was tiny - particularly considering the huge run-up in Treasurys all week.

Are you trolling? The only important index that matters (Europe was closed) was the S&P contract and it was long closed by 430EST on friday much before the official news hit. So no impact could be seen, but i assure you there will definitely be on.

TLT, long bond ETF, continued to trade until 8 pm on Friday. It was up 15bps.

While the SPUs were closed SPY traded until 8pm Friday and it was down 50 bps. Of course, the stock market was up 2% and down 3% within minutes on Friday. It's jittery.

The problem is that there are no good alternatives to Treasurys. There are other AAA rated sovereign bonds, but no market is as liquid and large as Treasurys. The U.S. Treasury rates are set by the market, not the ratings agencies. We are the cleanest dirty shirt.

TLT, long bond ETF, continued to trade until 8 pm on Friday. It was up 15bps.

While the SPUs were closed SPY traded until 8pm Friday and it was down 50 bps. Of course, the stock market was up 2% and down 3% within minutes on Friday. It's jittery.

The problem is that there are no good alternatives to Treasurys. There are other AAA rated sovereign bonds, but no market is as liquid and large as Treasurys. The U.S. Treasury rates are set by the market, not the ratings agencies. We are the cleanest dirty shirt.

Regarding the downgrade news, it was first heard around midday (London time) but none of the traders here believed it. I.e. 'noone has the balls enough to downgrade the Motherland'. Unless people had specific insider knowledge, i doubt many trading desks acted on this stuff, certainly not any PMs who never trade off rumors unlike prop and desks taking flow orders. To that latter end, we saw lot of stuff coming through on the credit side, but the MMs had widened their b/o enough to cushion any sort of illiquidity that could have occured otherwise on the very volatile day.

"none of the traders here believed it". I believe that. Reminds me of a large corporate customer I told would have to pay cash cuz they never paid their invoices in a timely manner, had to pull teeth to get paid. The fuckhead ivy league VP said to me " no one has EVER cut us off! How can you do that? We will not honor your invoices anymore!" Fuckhead didn't get I wouldn't be invoicing them anymore. Entitled fucks, of all persuasions, have a CD moment when their entitlements are denied.

Yes, but S&P has been telegraphing it for weeks and (hopefully) your traders also use their own internal credit research instead of relying on the political oligopoly of the "our probability of the entire U.S. housing market declining at the same time is zero because it's never happened before even though the national market never went up before either" ratings agencies.

It's not as if the objections the S&P lists are news to the market. The S&P provided no insights to the market. Yet, the Treasury yield is down 25 bps over the past week. Europe is falling apart, which means that the U.S. is the tallest pygmy and there will probably be a flight to Treasurys again next week.

The stock market is another story. But, an outflow from Europe could also boost the U.S. equity markets - even if that effect isn't immediate. Maybe. I covered my deltas and I'm long volatility. That's pretty much my only opinion about the equity market.

Since 'analysts' don't think it is happening, it is virtually guaranteed to happen. Maybe a few punches get thrown before it happens, but it'll happen nevertheless. It's been in the cards for more than half a decade.

Xinhua called for the printing of US dollars to be supervised internationally and repeated China's contention that a new global reserve currency might be needed.

You can dress it up any way you want. In the end, it's simple logic. When you borrow, as we have done over the past 30 years in order too boost GDP (and gotten less GDP for each $ borrowed each successive year), you get more in the present and less in the future. We are now in the future. It's simple exponential math. If debt grows faster than GDP, which it has for decades, then there is no way to "grow our way out of it."

At some point one is forced to stop the borrowing and pay down the debt. Of course no one tells the truth about what this actually means: an at least 10% hit to GDP as the so-called stimulus masquerading as growth disappears. Watching BBG TV last night, every single asshole they brought up was singing the "more short-term stimulus is needed" tune. Well, that's what you said in 2008! That's what you said in 2000! You can't paper over the simple fact that we are NOW facing the fact that we pulled forward demand for the past 30 years through debt-financed deficit spending, and that we actually have to pay that back now.

When you borrow, you get more in the present for less in the future. Welcome to the future.

Yep, we have debt saturation, not just in the USA but worldwide. Banking systems, households, governments. There is insufficient economic engine to surmount this mountain (or quicksand bog) of debt. Repudiations, write downs, forgiveness and living smaller is the only exit strategy with a chance.

yeah it's a "new age" all right with gold prices still surging, silver soaring and oil still running the so called global economy into the ground. a veritible "victory" for the epononymous "New World Order." we shall see how the Asian "success stories" open Sunday evening. Methinks "rising above it all" is fast becoming more than just some philosophical joke at this point. and again i renew my call for a draft. i think it is safe to title our Zero Hedge saga "FIATSCO!" at this point.

To be or not to be the euro queen, is the question that MERKEL ASKS herself. Its a game changer. For the EU as a whole. If the USD really starts spinning down and there is a consolidated cabal to search for a new reserve, then the Euro will be fortified, by the chinese and russian nest eggs. How the market regulation rules will be changed if the FED and US government get sidelined in the new financial architecture is what the chinese are asking themselves. Merkel/China/Russia (for its RM), plus a weaker USA is what the NWO will be if the US tanks economically. Its all pie in the sky as nobody knows how the US political system + WS Oligarchs will play their cards. In its current gridlocked state in DC it is a bonus for the other side.

But as the clock turns, it looks like Merkel will find it difficult to swallow the Italian cum Spanish monster debt. Ciao, ciao euro queen if this is true.

Good read. I always thought that the idea of school and "student government" acclimated us to fascist adult life as well. We "elect" our student representatives, but they don't do shit, except maybe get the "administration" to install a pepsi machine in an extra location, or give us "taco fridays." Through this sham system students are taught that the real issues, such as tuition, curriculum, and expressive rights, are beyond their control and to be taken for granted, set by the administration behind the scenes and to be accepted, good or bad. They are the way they are just because, SO WORRY ABOUT YOUR FUCKING PEPSIS AND STOP QUESTIONING. Sounds a lot like adult life.

***** “Over the last ten years, China has mounted the biggest challenge to the U.S. manufacturing sector ever seen, threatening producers of steel, chemicals, glass, paper, drugs and any number of other items with prices they cannot match. Not coincidentally, the United States has lost an average of 50,000 manufacturing jobs every month during the same period.” *****

so with being stranded in the Middle of a Planned Wealth Transfer the only reasonable answer that does not Hurt "We the People" or the strength of the Country going forward and dare I say would in fact allow for the funds to rebuild our infrastructure!

More importantly, had the credit rating agencies downgraded mortgage-backed securities from AAA to junk, like they should have done five to six years ago, we wouldn't be in as much of a mess as we are today.

Neener neener neener... No problem here, nothing to see, move along, keep spending dam you! If we want any lip from you people, we will scrape it off your 1040 or your grocery bill.

Press Release

Joint ReleaseBoard of Governors of the Federal Reserve System Federal Deposit Insurance Corporation National Credit Union Administration Office of the Comptroller of the Currency

For Immediate Release
August5, 2011

Agencies Issue Guidance on Federal Debt

Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations)

For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.

"The future role of rating agencies will also now come under close scrutiny, bringing to the fore the question of who rates the rating agencies? S&P’s action will likely unite governments in America and Europe in an effort to erode their monopoly power and operational influence. This will also force all investors to do something that they should have been doing for years: conduct their own ratings due diligence, rather than rely on outsiders."

It's not so much about due diligence (though a valid point) as it is about credibility and authority. All the clamoring from individuals (even the most articulate and sane, i.e. El Eriane) will be rediculed or ignored by the governments and their propaganda machines. S&P is just putting its Goodhousekeeping Seal of Approval on the obvious. As Truth is the first victim, it will be the ultimate victor, brought about voice by voice. The S&P downgrade is the call for the demonstrations in the streets, figuratively speaking. The crescendo is building.

El-Erian is wrong about treasury rates rising (they might rise just a little). The FED (and DC Politicians) will rip the face off of any treasury shorts (as PIMCO found out). They will never let rates rise to true market levels. They will print to infininty and buy treasuries. That is all. Hyperinflation here we come.

The last thing to do is play the blame-game, yet that is immediately what's going on now. Bush did it, no Clinton, no Bush sr, no Carter. It's the damned tea party, the socialist dems, those evil reps, fred flintstone blah blah blah. I swear the real danger is someone is going to get their eye poked out with all this finger pointing.

this pimco guy is about the worst pundit out there. he is totally reactive in what he write, is extremely nonspecific, and gives no investment advice. maybe he is great behind closed doors. but to me he appears to be an emperor without clothes.

<p>Forget about S&amp;P downgrading France. It was just an example from Mo. It will not happened regardless of what disgruntled Americans think or not. The US is in much worse shape than France. Full stop.</p><p>If You don't like it? F... U.</p><p>U get what U voted for.</p><p>Sarkozy is a leader in a democratic system whereas Obama is a victim of a plutocracy.</p>

<p>Forget about S&amp;P downgrading France. It was just an example from Mo. It will not happened regardless of what disgruntled Americans think or not. The US is in much worse shape than France. Full stop.</p><p>If You don't like it? F... U.</p><p>U get what U voted for.</p><p>Sarkozy is a leader in a democratic system whereas Obama is a victim of a plutocracy.</p>

Forget about S&P downgrading France. It was just an example from Mo. It will not happened regardless of what disgruntled Americans think or not. The US is in much worse shape than France. Full stop.If You don't like it? F... U.

U got what U voted for.

Sarkozy is a leader in a democratic system whereas Obama is a victim of a plutocracy.

The $1 Billion Armageddon Trade Placed Against the United States The $1 Billion Armageddon Trade Placed Against the United States By Jack Barnes, Contributing Writer, Money Morning

Someone dropped a bomb on the bond market Thursday - a $1 billion Armageddon trade betting the United States will lose its AAA credit rating.

In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.

The massive trade wasn't placed in bonds themselves; it was placed in the futures market.

The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.

The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it.

However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio.

If there was to be any REAL reform or justice in this controlled demolition it would be the disillusionment of the Fed and the proxy-interest charge ponzi that is the issuance of UST through the primary dealers

Instead what will happen is the collective eunuchs called Congress (And France, Germany and the UK - with pointy sticks from China and Russia) will look for salvation from BIS and a new world reserve currency of which the USD will be but one fractional component - like a basket of potatoes. Thank the quite illegal Super Congress and Obama for that gem. Now a representative democracy, its Constitution, Bill of Rights, the Magna Carta, John Locke, the Reformation and all that history has no better weight than the rambling Politburo palace intrigue of the Chinese Communist Party and its billion powerless hive-slaves.

If you think your plays in the market come a day late and a dollar short these days, just wait until Treasury does not even know when it will be allowed to conduct its own issuance.

Maybe those Ruskie intel-types had it right last year. Second American Civil War.

I guess the next shoe to drop is the public appointment of the members of this Super-Congress.

Wanna punch China in the nuts? Stop shopping at WalMart and stopping buying iphones and ipads.

I'm as guilty as the next guy for looking for a deal for my dollars. But I'm fed up with the rest of the world acting like America is the new Rome and if we all died things would be better. Fuck the lazy Eurotrash and socialsim. Fuck Asia and sweatshop labor and working people to their death.

This is MY revolution!

I'm a pretty smart guy. ZH has helped. Going forward, I'm going to spend my dollars with American companies. I'm going to pay a premium to buy locally because it helps my community. I'm through with debt and instant gratification. I'm through with fake tits and gold chains. And I'm through with politicians that jerk off on my interests.

Going forward, I'm going to make sure that my friends know what a rim job we're getting from our government. Going forward, I'm going to hold my elected representatives responsible for their actions. Going forward, I'm going to help my nation build capital by saving my money and paying attention to my place in the economy.

Your fucking wallet is a gun. Your words and actions are bullets. Enough of this shit.

He also said: "putting the country back on the path of high growth, job creation and financial soundness". This is impossible to achieve, as financial soundness would lead to massive unemployment and low/no growth. Is he full of BS, or what?